Investing In Bonds

After Last Year, Is It Still Safe To Invest In Bonds?

Most financial advisors are wussies. They’re too afraid to ditch an old investment playbook that might not work going forward for the same reason we’re too afraid to ditch an old life script that might not be the best thing for us going forward. A script is when different parts of your life feel like variations on the same old story. Living by old scripts is easy, because it’s familiar and therefore comfortable.

Like, if we’re used to dating people we know we could do better than, just because we're more afraid of being alone. Or if we’re in a job or career that we don’t like, it’s more comfortable to stay in that job versus starting from scratch with something that may or may not pan out.

Most people choose what they know and repeat behaviors that they know because the unknown frightens them.

This is why people got sucker-punched with most of their bond fund investments in 2013. So now financial advisors are standing around scratching their balls trying to figure out if they need to rewrite the rules when it comes to bond investing and adapt to the new environment we’re in. Most are choosing not to.

The truth is that it’s time to ditch the old bond investing playbook, and here’s why. First...

What Is A Bond?Imagine you loan your money to the government for 10 years. And the government pays you 3% in interest payments per year for 10 years for that loan. You own a 10-year government bond.

If you loan your money to a company for 10 years and they pay you 5% interest every year for 10 years, you own a 10-year corporate bond.

If you own a bond, you gave out a loan and will receive interest in return.

Why Did The Value Of Some Government Bonds Decrease By Over 10% In 2013?Imagine if you loaned your money to a friend for 10 years and they paid you 2% in interest each year. Then imagine the next day they went to another friend and borrowed money from them for 10 years as well. But that other friend said fine, “I will loan you that money, but you need to pay me 3% in interest each year, not 2%.”

You’re now in a worse situation because that new 10-year loan or bond now pays 3% in interest and yours only pays you 2% in interest each year.

That’s why, when interest rates go up, the value of existing bonds go down. That’s what happened in 2013. Interest rates hit record lows last year and then went up.

There are three main assumptions about government bonds that worked over the last 30 years (up until 2013) that need the boot.